PP_Slides_Class_26_Monday_April_21

PP_Slides_Class_26_Monday_April_21 - Good Morning Class 26...

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Unformatted text preview: Good Morning!! Class 26 Monday, April 21 But a gold standard requires 1. that the world’s gold supply increase as world economies grow 2. countries must accept periods of recession and inflation in early 20 th century (1900s) 1. world’s gold supply quit growing as fast as world economies were growing 2. countries became less tolerant of periods of recession and inflation due to World Wars I and II, some countries ran out of gold Bretton Woods, New Hampshire 1944 set up modified gold standard each country’s currency fixed to US dollar AND US dollar fixed to gold amount no longer did trade deficits automatically eliminate themselves if a country ran consistent trade deficits, it could devalue its currency relative to the dollar since September 19, 1949 was $2.80 to 1£ Britain devalued November 18, 1967 to $2.40 to 1£ means 1£ is worth less $ US goods become dearer, British imports ↓ British goods cheaper, British exports ↑ British trade deficit goes away Problem: no country wants to devalue looks like country is weak Why did fixed exchange rates end? US was running trade surpluses but foreigners will willing to hold dollars UNTIL: because of Vietnam War, US got big inflation but US was not willing to endure a recession to remove the inflation foreign central banks started redeeming $ for gold, Fort Knox was running low on gold, Nixon closed the gold window on August 15, 1971 1. Floating exchange rates a. float according to the laws of supply and demand b. are fixed by speculators in foreign exchange markets c. are rarely used in foreign exchange transactions d. exhibit all of the above characteristics March 1973 Floating Exchange Rates supply and demand determine the price of a currency price of 1$ is .5£ exchange rate £/$ .5£/1$ price of 1£ is 2$ exchange rate is $/£ 2$/1£ 2. 2....
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PP_Slides_Class_26_Monday_April_21 - Good Morning Class 26...

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